Adam Smith's Lost Legacy

GavinK9 AT gmail DOT com

Friday, March 30, 2007

Reclaiming Adam Smith – Part Two from Fletch

Here are some extracts from Part Two of Fletch's posts on Adam Smith. They are particularly interesting because their command of what Smith wrote and meant is rare in Blog land (and rarer still in academe where it is influenced by Chicago's version of Adam Smith and not by the man from Kirkcaldy).

"Unlike in the case of child labor, Adam Smith spoke extensively about the issue of governmental involvement in the economy. It was, in fact, his primary concern. Modern liberals, however, have attempted to distort what he actually had to say about the issue in order to claim that he would share their advocacy of worker protection laws, anti-trust laws, interference with the free trade of free individuals in the international marketplace, etc., as if Adam Smith were a kindred spirit. Again, nothing could be farther from the truth. The passage from The Wealth of Nations most frequently cited as endorsement of the modern liberal position is this one:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” [WN I.x.c.27: p 145]

It seems a simple enough declarative statement condemning the actions of businessmen who will typically conspire against workers and the general public unless something is done to prevent it, right? Wrong.

Smith was describing the behavior of tradesmen under the guild system that existed in late eighteenth century England and Scotland - a system he vehemently opposed. It was a state-enforced, self-perpetuating trade oligopoly that fostered such behavior. And while the system had characteristics that were in some ways similar to both modern corporate structures and organized labor, it was materially different from either. It was specifically this state-facilitated collusion that Smith was attacking, not the actions of free individuals in an open marketplace.

One need look no further than the remainder of the same paragraph in which those fateful words can be found in order to understand the context in which they were actually written and to see the gross distortion that is necessary in order to co-opt Smith’s message. If the man from Kirkcaldy were advocating a governmental solution, rather than the removal of governmental involvement, then would he follow with, “It is impossible indeed to prevent such meetings[,] by any law which either could be executed, or would be consistent with liberty and justice (emphasis added)”? [Punctuation corrected from WN] Obviously, not. It would be completely inconsistent with his entire body of work in defense of individual liberty to suddenly advocate state intervention to prevent free individuals from coming together.

It is in the next sentence that Smith identifies the real culprit in this scenario, as embodied by the guild system: “But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies[;] much less render them necessary (emphasis added).” [Punctuation corrected from WN]

The guild system as it existed in Smith’s time involved the incorporation of business interests (Note: the terms “incorporation” and “corporations” as described in The Wealth of Nations refer not to corporations in the modern sense, to which, as alluded to previously, they bear little resemblance, but, rather, to the guild system as legitimized by state sanction.) into protected trade organizations that could stifle competition, control wages and prices and act as an oligopoly. This, the ham-handed intervention by the state that undermines the free market process, was the target of the moral philosopher’s ire.

Smith even goes on to say: “A regulation which obliges all those of the same trade in a particular town to enter their names and places of abode in a public register, facilitates such assemblies…. [WN I.x.c.28: p 145] A regulation which enables those of the same trade to tax themselves in order to provide for their poor, their sick, their widows and orphans, by giving them a common interest to manage, renders such assemblies necessary…. [WN I.x.c.29: p 149] An incorporation [see the caveat mentioned above] not only renders them necessary, but makes the act of the majority binding upon the whole. In a free trade an effectual combination cannot be established but by the unanimous consent of every single trader, and it cannot last longer than every single trader continues of the same mind. The majority of a [guild] can enact a bye-law with proper penalties, which will limit the competition more effectually and more durably than any voluntary combination whatever (emphasis added).” [WN I.x.c.30: p 145]

“The pretence that corporations are necessary for the better government of the trade, is without any foundation. The real and effectual discipline which is exercised over a workman, is not that of his corporation, but that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence.” [WN I.x.c.31: p 146]

Smith explicitly argues that the absence of government involvement – as exhibited by, in this case, the creation of the guild - is sufficient protection for the workman and the public. This, alas, is not the only passage from Smith’s magnum opus that is grossly distorted to make it appear that he favored protections for workers against the depredations of unscrupulous businessmen. There is, of course, this passage:

“It is not, however, difficult to foresee which of the two parties [masters or laborers] must . . . have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily; and the law, besides, authorises, or at least does not prohibit their combinations, while it prohibits those of the workmen.” [WN I.viii.12: pp 83-84]

And this one:

“The masters upon these occasions are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen (emphasis added).” [WN I.viii.13: p 85]

In each case, the thrust of Smith’s argument is not that workers require protection from “masters”, but rather that the involvement of the state (“those laws”) is the problem to be addressed, in the absence of which workers would not need further protection.”

CommentI have corrected punctuation in square brackets [ ] and presented references, though the emphases are due to Fletch. This is a rare occasion when somebody has not only read Wealth Of Nations but also he has interpreted the text quoted accurately, aligning is interpretation to be consistent with Adam Smith’s theme of Perfect Liberty (even rarer).

Contrary views and themes from the Left (or at least New Labour) can be read in Ian McLean’s ‘Adam Smith, Radical and Egalitarian: an interpretation for the 21st century', 2006, Edinburgh University Press, foreword by Gordon Brown (UK Chancellor of the Exchequer). It doesn’t deal (from memory) with either of the issues raised by Fletch, which is a pity because partial interpretations do not do Adam Smith justice, and may compromise claims to accuracy of implications that Smith was a kindred spirit of New Labour (or of conservatives in the US).

This does not meant Smith was absolutely right about the balance of power, but I think it is incumbent of scholars to present the whole Adam Smith, warts and all, and not just selected pieces with which they agree with in 21st century Britain and the US. On these issues raised by Fletch he is closer to Adam Smith from Chicago.

Reclaiming Adam Smith - a conservative contribution

A person called ‘Fletch’ of Loganville, Pennsylvania, USA writes a Blog, “Fletch for Freedom” (a Blog within Town Hall.com., of which I know no more) has written two most interesting interpretations of Adam Smith, with which I more or less concur, though I am not so sure whether I would support Fletch’s politics, which appear to be ‘conservative’ within the US Republican tradition, and about which I follow Lost Legacy’s position of not being affiliated to any political party, tendency or band of sympathisers, except for selected such alliances within the country I vote in, namely Scotland.

However, that said, the posts by Fletch are extremely good in that they address issues in Smith’s Wealth Of Nations with which Lost Legacy has commented in the past, in particular the much quoted (or rather misquoted) criticism of tradesmen in town guilds or ‘corporations’, who conspire against consumers to raise prices, which many persons of the left, or in US terms of ‘liberal’, persuasion misread and reword to imply that Smith was talking about modern day ‘corporations, when he wasn’t.

Here is his first post on Child labour (28 March):

“Reclaiming Adam Smith – Part One: Adam Smith and Child Labor”

“Frequently, those who would misconstrue Smith’s writings will concentrate, to the exclusion of all else, on the fact that he was a “moral philosopher”. This is a common tactic of the Left – perhaps the most common – wherein the position taken is deemed to be “on the side of the angels” and all others are deemed to be morally inferior and, therefore, unworthy of further consideration. In reality, this is a false debating tactic designed to obscure the fact that, typically, both sides of the debate agree that the societal issue to be addressed (poverty, tyranny, slavery, etc.) should be reduced and the real debate involves the suggested methodologies to bring this about. Thus, those cloaking themselves in the blanket of moral superiority conclude that because Smith was a “moral philosopher” that he must have objected to child labor. Nothing could be farther from the truth.

I have no doubt that Smith would have been delighted that child labor has largely come to an end in the Western world, but that is not the same thing. It must be remembered that the abolition of child labor is a conceit of modern prosperity in an industrialized world. In Smith’s time, child labor was the norm, considered by all concerned to be completely ordinary because the economies of the world in the late eighteenth century were overwhelmingly agricultural. Suggesting to a farmer then (and in many parts of the world today) that the family farm should not be worked by all members of the family would be met with simple incredulity.

As the very things that Smith observed began to take hold over time – primarily the greater reliance upon the division of labor and industrialization – the related increase in overall prosperity ultimately made it possible to consider freeing the society’s children to engage in other pursuits. It did not, however, happen overnight. As much as twelve years after Smith penned The Wealth of Nations, the new water-powered textile factories in England and his native Scotland were overwhelmingly staffed with children. It wasn’t until Lord Shaftesbury campaigned to bring an end to child labor in England that the trend was even reversed - and he wasn’t even born until more than a decade after Smith was in his grave.

In this country and elsewhere, the move to bring child labor to an end was less the result of concern for the little kiddies than an attempt by the newly growing organized labor movement (in the early nineteenth century) to restrict employment opportunities for others so that their own wages and employment levels would be increased. It was the trade unions that began agitating for restrictions upon child labor in the early 1830s and it wasn’t until the 1830s and 1840s that child labor laws were passed for the first time both here in the United States and in England. In fact, it would be another century (1938) before minimum ages of employment were established by federal law in this country.”

CommentHow refreshing to read somebody placing an issue in its proper context. Child labour in 18th century Scotland was in no way analogous to child labour in 21st century developed countries, which have abolished it in the main, requiring children to be attending universal education institutions. In the developing world, and the non-developing, world child labour remains a harsh fact of life, and the pennies earned may make a difference of life or death for their families. Well-meaning affluent observers who campaign against child labour in plants supplying foreign-owned markets sometimes condemn the exploited children to worse than they seek to protect them from – child prostitution, male and female, literal starvation, lives of crime, and so on.

Twelve-hour days in factories are an alternative to 18-hour days in the fields. Child labour from the 17th century in Britain was worth pennies a day that added to a few shillings a week, supplementing a family’s income to at or above the survival diet. Children attending the Parish schools in Scotland (long before universal education in England) often left at around eight because of family destitution – that Adam Smith was able to continue attending school until 14, when he went to Glasgow University, was not a universal practice – occasional talented children (boys exclusively) who showed eligibility for university, sometimes made it through with charitable support, but desperately poor parents normally pulled them out of school and put them to work.

Until society produced the capital to hire labourers for above subsistence wages, and the raw materials to work upon, there was no alternative, and there still isn’t in many developing, and all non-developing, countries today. The corruption, vileness, and mendacity of many of the rulers of these countries, with their mercantile policies (mirroring the same policies of mercantile governments in the richer developed countries), locks poverty away from the only lasting remedy: the creation of wealth – the annual flow of ‘the necessities, conveniences and amusements’ of life, and these comes from establishing wealth creating enterprises and not, unfortunately from palliatives of rock concerts, charities and ‘aid’ to governments (aka ‘filling the pockets of the corrupt’, and also ‘massaging the consciences of the mega-rich’).

Misquoting Adam Smith

Adam Smith is often called upon as 'hook' upon which to hang arguments about current political affairs that are only loosely connected and, as often as not, wrongly associated with the subject selected for 'das Adam Smith' treatment.

In this example, the subject is about the 'duty of government' in a minor incident in the 21st century and has nothing much to do with Adam Smith in the 18th century, especially when the source is misquoted.

Mark Peters writes in his Blog, Taxing Times (‘a blog dedicated to the discussion of matters historical and current inssues of military and political natures), 29 March: “Adam Smith and the Duty of Government”

“Adam Smith, in the Wealth of Nations Book IV, maintained that government had three duties, namely:

1) Protection of it's [sic] citizens from external aggressors.2) Protection of it's [sic] citizens from internal aggressors.3) The provision of welfare, within society, to those in need and whom could not be supported by the free market.”

CommentYes, memory can play tricks on one’s habit of accuracy, and it is not always that important. But readers may not notice the unintended errors and might repeat them in contexts where it is important.

So, at the risk of boring those who noted the errors in the passage above I shall correct them (keener readers may wish to do it quickly themselves – for practice):

● Adam Smith’s Wealth of Nations consists of five book, numbered I through V, and Book IV, ‘Of Systems of Political Œ’, contains Smith’s critique of the ‘mercantile system’.

● Smith’s statements of the duties of government are in Book V, ‘Of the Revenue of the Sovereign or Commonwealth’.

● These ‘expences’ pay for the duties of ‘defence’, ‘justice’, and ‘public works and public institutions’ (which include ‘institutions for the education of youth’ and ‘people of all ages’ and, en passant’ relief from the ‘loathsome diseases’) and the ‘dignity of the sovereign’.

● They do not include what we mean by ‘welfare’.

● Neither should we reduce the entire range of justice to ‘protection of its citizens from internal aggressors’, as if it mirrors defence.

As for the context of the Blog post – the hostage taking of British sailors by Iran – I have nothing to say, it having little, if anything, to do with Smith’s legacy.

“By the time you read this article, the whole ethanol/corn/soybeans landscape may have changed dramatically. But heading into the USDA’s March 30 prospective planting report, the whole ethanol thing is just too close to call. It all comes down to Adam Smith's invisible hand.

The truth with corn – and this is what makes agriculture commodities different from others – is that we are a long, long way from running out of arable land. If Smith was right, we should expect farmers to bring new supply into the market in droves, hoping to cash in on the almost two dollar-a-bushel price increase we’ve seen on corn over the past two years.

This is why investing in softs can be such risky business. Unlike, say, gold, new supply in agriculture can be brought online in a comparative blink of an eye. All it takes is a handful of farmers plowing new land, or switching from soybeans to golden maize. How quickly that supply comes on line, and whether it overshoots the mark, are the questions.”

CommentIt has nothing to do with Smith’s invisible hand. It’s how markets work, as he shows clearly in Books I and II of Wealth of Nations.

Some farmers plough some extra land, others plough the same as last time, and the rest cut back on what they did last time. Necessarily the effects on output are lagged by the growing season. Before that experts calculate as best they can how much has been planted, how much is expected to be harvested, weather details, and anticipated prices on the basis of this information. Final prices shift upwards or downwards depending on actual quantities produced.

Which invisible body parts have a role in this? What do they do? How do they know in advance to switch farmers from plowing to non-plowing? The metaphorical body parts don’t, nor do the real brains of humans (they're guessing according to hoped for returns).

Aligning all this with Adam Smith, who referred to ‘an invisible hand’ once and in reference to something else in Book IV is one of the lesser atrocities committed by Chicago economists in the last century on his legacy. It also is a pretty silly notion too.

Wednesday, March 28, 2007

Some People Quote Smith Appropriately

It’s great when an author quotes from Wealth Of Nations and puts in its proper context, especially when it is one of his most oft repeated quotations – the one about people of ‘the same trade’, etc., ….

Jake Mortenson of the University of South Dakota contributes a column to ‘USD Volante’ at Vermillion, South Dakota, and writes about Smith’s quotation and the strange inconsistency in state sponsored interventions in different markets:

“As a general rule, beware of any laws concerning economic transactions with "fair" in the title. They are usually no more than means for well-organized producer groups to gain an "unfair" advantage over consumers by limiting competition. As Adam Smith once wrote: "People of the same trade seldom meet together ... but the conversation ends in ... some contrivance to raise prices ... [Government] ought to do nothing to facilitate such assemblies, much less render them necessary."

In other markets, most notably gasoline, Mr. Smith's words are heeded. Price collusion is strictly prohibited. In alcohol sales, it is apparently against the law to NOT collude at a certain price level. With all of the vague, biased language stripped away, what SDCL 37-10A-1 boils down to is a legalized form of price collusion. In a state which supposedly favors limited intervention in markets, it is disappointing that the 1989 South Dakota legislature had not read Mr. Smith or chose not to heed his warning. It is the hope of this columnist that future lawmakers will not so easily succumb to well-organized producer groups.”

CommentPerfect. See the original quotation in context at: WN I.x.c.27: p 143.

Note the contradiction: encouraging competition, with a great deal of suspicion that it is not operating effectively, in the oil industry and on garage forecourts, and blocking competition in alcohol sales and being pleased with the non-competitive results.

I am aware of the 'moral hazard' arguments for alcohol and tobacco sales, though even here there is a contradiction in respect of the outright prohibition of drug sales, a policy that has been an absolute failure in neither preventing consumption or supply, and have filled out jails with thousands, plus the many thousands of others who remain uncaught from committing crimes to acquire the money to purchase the drugs and, as a byeproduct, enrich the criminal suppliers. But that's another story.

Tuesday, March 27, 2007

China's Social Experiments and The Velocity of Change

“But 21st-century China is neither fish nor fowl; it is the world's fastest-growing economy, where capitalism seemingly has replaced socialism as the financial model with a zeal that would make Adam Smith proud. This has greatly raised Chinese living standards. But, in the process, it has created a tiered society; a growing middle class that has benefited enormously from the shift toward capitalism, and the largely rural poor who have been left behind.”

CommentAt precisely the time when Western Europe was awakening in the 15th century from a millennium of stagnation, following the fall of Rome, China was a fairly vibrant economy, well advanced in science and technology and on the eve of continuing through into innovation and application, when the Chinese political regime embarked on a self-destruct policy of cutting itself off from the rest of the world, abandoning expeditions to explore the continents overseas and curtailing economic development and trade.

The rest, as they say, became history. The maritime powers of Europe embarked on world explorations, improved primitive science and technology, began the shift from superstition within fractured religious orthodoxy, and slowly and gradually raised gross domestic products as revitalized trade spread across its lands.

By the time that the powerful trading nations and their colonies confronted mainland China in the 19th century, the gap between them was manifest, not just in naval power, but also in commerce, technology, basis science and active markets. China was stagnant, technically backward and not developing (noted by Smith in Wealth of Nations). In the mid-20th century, China added to its woes by embarking on a massive social experiment, under the influence of a minor European ideology for the proletariat, a version of Marxism, adopted to fit a peasant society by Mao and his communist party. It was as disastrous a 50-year social experiment as China's 500-year experiment adopted in the early 15th century.

The rapidity with which China has abandoned the Marxist faith almost hides the haste with which it has embraced market solutions, albeit within the bounds set by the Communist Party. The skylines of Shanghai, Guangdong, Beijing and dozens more testify to the surface transformations of a stagnant, state-run socialist economy into the most vibrant market economy on Earth, unprecedented in history.

But the speed, breathtaking as it is, raises serious concerns. The ‘largely rural poor who have been left behind’ are inevitable, for while no country needs to take as long as it took the original market powers in Europe to move from stagnant agriculture to markets, and then to industrial capitalism, there is limited scope for even China to do other than ‘leave behind’ vast segments of its population. Smith always used the phrase ‘slowly and gradually’ for all cross-societal changes because that is what happens, whatever the inclinations of commentators, analysts and forecasters to have everything change at once. Social change does not move at infinite velocity, neither do markets, despite what is expected from half-understood diagrams in price theory.

Peter Browne mentions that in 2006 there were ‘23,000 "mass incidents," which is bureaucratese for riots’ in rural China. My immediate reaction is ‘only that few’? People’s expectations of change may be low, but their anger at exclusion is easily provoked into impatience.

But I do not think that Smith would have been ‘proud’ at the ‘zeal’ of the Chinese communist party functionaries. He was always suspicious of changes promoted by legislators and princes, especially when guided by ‘men of system’ (the Chinese Communists leaders combine all three roles in one). Markets tend to devolve decision-making downwards, and while they are not dependent on secular democratic forms of government, they tend to be compatible with them, and, most important, people living in market economies are more comfortable with democracy than with authoritarian dictatorships (hence, authoritarian leaders – e.g., Malaysia and Singapore – dress their political support in ‘democratic’ clothes).

Two Funerals and Das Problem

Adam Smith, the 18th century Scottish philosopher, is considered to be the founding father of capitalism. In his book The Wealth of Nations, he notes that society is most productive when structured around the self interest of every individual. Smith says that:

"It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest."

So free enterprise is the best way to structure society. Let the market decide what’s good or bad, and whether Yankee logos belong on coffins.

But at the same time, Smith wrote another book, The Theory of Moral Sentiments. In it, he sees society as based on mutual love and sympathy:

It is thus that man, who can subsist only in society, was fitted by nature to that situation for which he was made. All the members of human society stand in need of each others assistance, and are likewise exposed to mutual injuries. Where the necessary assistance is reciprocally afforded from love, from gratitude, from friendship, and esteem, the society flourishes and is happy.

So in one book, Smith says society is best structured around self interest. In another he says it is best structured around love and gratitude. So which is it?

This question, known as the “Adam Smith Problem”, is one that has baffled scholars. Clearly, Smith may have embraced laissez faire capitalism, but also realized a society structured around pure self interest would lose its soul. Or, to apply it (rather crudely) to my case, capitalism might produce a New York Yankee coffin, but capitalism should not have the final word. Our spiritual values should make the ultimate decisions.”

CommentI wouldn’t presume to comment on the Talmud or Torah (though I remember some interesting questions in them that I often used to illustrate early ideas in statistical probability for students) without finding out a great deal more about them than Chaim Steinmetz has found out about Adam Smith before pronouncing on what he is alleged to have written.

That he considers that Adam Smith had a problem with ‘capitalism’ is acutely wrong – he never knew anything about capitalism, a phenomenon from the mid-19th century, back projected onto him by 20th century neoclassical economists and graduates who passed through Economics 101 as taught by graduates from Chicago. Smith wrote about commercial markets, not about capitalism, an economic form driven by finance capital, either accumulated or financed by banks, and not the result of savings out of personal income.

Taking Smith’s model of society, through the ‘four ages of man’ from hunting, through shepherding, farming and (‘at last’) commerce, accommodates the notion that “society is most productive when structured around the self interest of every individual” throughout each age, and not just that of commerce.

He asserted (Lectures in Jurisprudence, 1763-4 and Wealth of Nations, 1776) that the behavioural traits of ‘seeking to better oneself’ (‘from cradle to the grave’), of the ‘propensity to truck, barter, and exchange’ (from the beginnings of humans), and the ‘division of labour’ (requiring the first formations of capital stock – subsistence) were always present in societies of humans. As were (Theory of Moral Sentiments, 1759) the moral sentiments (sympathy, concerns for the judgements of others, via the impartial spectator) which society held up to all as through a mirror.

Hence, he didn’t say that ‘let the market decide what’s good or bad’ nor his Chaim’s allusion correct in: “Clearly, Smith may have embraced laissez faire capitalism, but also realized a society structured around pure self interest would lose its soul.” For a start he did not ‘embrace laissez-faire capitalism’; he never used the words ‘laissez-faire’ (nor ‘capitalism’). For the culprits, please refer to the gentlemen and ladies from Chicago.

In both Moral Sentiments and Wealth of Nations he stated the need for justice, curbs on the self-interested proclivity for monopolists for protectionism, for conspiracies against consumers, and called for the stiff application of the laws of justice against self-interested criminals, fraudsters, assaulters against the person, thieves, and such like. He wasn’t too fond of self-interested princes fighting wars for trivial vain-glory ends, nor for chartered trading companies, and mercantile colonies.

Chaim Steinmetz is not in possession of the full facts (i.e., a politer way of saying he is wrong) when he concludes that “the “Adam Smith Problem”, is one that has baffled scholars”. It hasn’t. It baffled some readers who didn’t know of the existence of the student notes of Smith’s Lectures, found respectively in 1895 and 1958, or who haven’t read them since they were widely published in 1982, and it may baffle those who have picked up ‘the problem’ second-hand. It was never a problem to Smith and it isn’t to those familiar with his books.

On the issue of whether persons should leave instructions to have their coffins carry the logo of a sports team, in this case ‘the Yankees’, if it is not illegal, causes no offence to his immediate family, and reflects their passions during life, I am prejudiced in favour of Liberty.

Recently, I have attended several funerals with ‘unorthodox’ ceremonies. I would never presume to tell others how they should make that journey, or who should be present, or not, as the case may be. Smith criticised David Hume’s choice of grave stone, considering it too ornate for his own taste and his sense of frugality in matters of using funds for unproductive labour.

No Profits in Colonies

Not often you find an entire and plausible hypothesis summarised in a single paragraph, covering a history period from the mid-18th century through to the mid-20th century. It is also an instructive counter to those who think that society is a one-dimensional exhibit of the workings of Homo economicus.

Rafe Champion achieves the one-paragraph test in his post on ‘The betrayal of liberalism’ in the “Catallaxy” Blog:

“Keith Windschuttle has contributed a really excellent historical study of the waxing and waning fortunes of British liberalism, especially in relation to imperialism and the Empire. Adam Smith and David Hume saw no future for overseas dominions other than as friendly trading partners and similar views were held by the 19th century Manchester radicals such as Cobden and Bright. However one evil led to another because the threat of Napoleon prompted Britain to establish a worldwide system of naval bases to protect their sea trade and later these became the entry points for colonization of the pink ‘coloured empire that extended’ around the globe.”

CommentSmith commented that it was an error to think that society required ‘Perfect Liberty’ before it progressed from barbarism to opulence. Desirable as general Perfect Liberty would be for such development, it was neither a necessary nor a sufficient condition for opulence over a long enough period. On this basis he did not indulge in predictions about the future. He concentrated on elaborating on the deficiencies of mercantile political economy and their impact on contemporary 18th-century Britain (Book IV, Wealth of Nations).

His thoughts on the role of colonies were fairly negative and this showed in his assessments of the rebellion in the British colonies in North America. I imagine that he would have been critical of the British colonial empire in India (he was a trenchant critic of the East India Company’s role in India during the 16th-18th centuries) and more so of the 19th century’s British colonies in Africa.

Those who saw imperialism as the ‘highest stage of capitalism’ (early 20th century) linked it to economics, missing the point that the strongest economic ties and destination of capital exports were to North America and Australasia and not the ‘colonies’, which cost more to garrison and defend than they provided repatriated profits for London. These colonies were the follies of governments, not the projects of capitalists. Any profits made by individuals were small compared with the costs of the military establishments believed necessary to keep the ‘Frenchies’ and ‘Huns’ at bay.

The colonies, as the bastard children of national rivalries, also contributed a mixture of good and bad for the inhabitants; the good being the institutions of the rule of law, education and medicine they brought along; the bad being the racial treatment, plunder and bad examples meted out by vile individuals.

[Read more of Rafe Champion’s article – it’s a good read at: http://catallaxyfiles.com/?p=2686]

Sunday, March 25, 2007

Who Wants the State to Run Mobile Phone Services?

Pharoz (‘a weblog about Australian politics, science and religion’), 25 March, carries an article about privatisation in Australia (in 'coms', a technology far removed from industries like Coal):

“Economic fundamentalism doesn’t always work for more sophisticated systems. Adam Smith may have complained about Corn Laws in his time, and the advantages of markets, but transferring that approach straight into today’s more complex systems is akin to trying to stick a sim card into a cob of corn and expecting to be able to make calls from it.”

[Read the rest of the Pharoz article at: http://www.7gs.com/pharoz/?p=845]

CommentRhetoric is not a compelling argument on this occasion. The social consequences of the Corn Laws was every bit as complex as telecoms (it took long enough to achieve repeal). The issue is not complexity: it is whether a market will produce better results for society than state-run organisations. The best way to answer such questions is to experiment and compare the outcomes.

State-run organizations usually are subsidized and protected as national monopolies, and are managed by politically-appointed ‘experts’, using the capital raised by compulsory taxation and allocated by the ‘good ideas’ of politicians (aka: party policies) and by public servants. If they get it wrong they are moved from their posts with difficulty, sometimes years after they have failed and the politicians have retired, dropped out, promoted, or have been ‘honoured’ in the usual manner.

Private-run organizations attract private capital if they are, or are likely to be, successful in the separate minds of thousands of dispersed persons risking their ownership, or stewardship, of capital. Private capital is raised by judges of performance who act swiftly to correct the errors of those managers who get it wrong (they lose their jobs, and often much else besides) and to reward those who get it right (they attract more capital should they need it – on the same impersonal terms).

There is nothing invisible about the rewards and retributions of markets.

Politicians in Britain are notorious failures at ‘picking winners’ (the computer disks of the 80’s) and are predictably awful at subsidizing ‘losers’ (textiles, shipbuilding, steel, coal, utilities, motor vehicles, air travel, railways, road transport, R&D, - the list goes on and on in Britain). Smith called private investment that fails ‘misconduct’ and state investment in activities that fail is no different, except usually measured in tens of millions (WN II.iii.26: p 340-41).

The waste from both sources in terms of capital that could have been available for innovating and modernizing the British economy – a source of unproductive activity noted by Smith in Wealth of Nations (Books I to V) – slows down, sometimes eliminates, the creation of wealth from economic growth. The worst of the private practitioners of prodigality aggregated together is but a small proportion of the state sponsored prodigality to which Britain has been subjected since the 18th century, and was a world leader after the Second World War

Smith put it trenchantly:

‘It is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the œconomy of private people…. They are themselves always, and without exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust people to look after theirs. If their own extravagance does not ruin the state, that of their subjects never will’ (WN II.iii.36: p 346).

Songs of Praise for Invisible Body parts

“Gerry Spindler: Glimmers of hope at the bottom of the pit. It's tough being a former state-run monopoly in a privatised world, but the Chief Executive of UK Coal remains philosophical”

“Ordinarily, you might not expect the chief executive of what used to be British Coal to quote Mark Twain and wax lyrical about the economists Milton Friedman and Adam Smith. But Gerry Spindler, the American head of UK Coal, fancies himself as a bit of a philosopher.

"I am a disciple of Milton Friedman," he says in his slow, measured tone. "I believe in Adam Smith's 'invisible hand'. I have seen the free market economy work and I am a believer."

Just for good measure, he also warns sagely: "You can't trust capitalists," without explaining whether he includes himself in this category.”

CommentYes, markets work but whether they need or there is ‘an invisible hand’ running the show is not in doubt: there isn’t, and Adam Smith never said there was. His explanation of markets (Books I and II of Wealth of Nations) did not invoke any invisible body parts at work.

The neoclassical economists from Chicago who linked the metaphor (from Book IV) to markets (Books I and II) have sowed confusion –even helped to start a new religion for ‘believers’, of which Gerry Spindler appears to be one (of many). He sings praises to an invisible body part like the ancient pagans who sang praises to invisible gods who lurked in every tree, stream, cloud, storm, earthquake, eclipse, rainbow and season.

[Read more of Tim Webb on Gerry Spindler at: http://news.independent.co.uk/business/analysis_and_features/article2390835.ece]

Saturday, March 24, 2007

Trade and Full Employment

OP-Ed News.com, 23 March, carries an article by Richard Backus, ‘The Globalization Hoax’, which heads of into the stratosphere with this:

“Globalization, in theory at least, was an economic philosophy which espoused a more efficient production of the world's manufactures for the benefit of the world at large. It is based upon an economic theory proposed, I believe, by Adam Smith that if each manufacture was produced by the most efficient worker in the world, production would be maximized with the best use of the world's resources (manpower, materials, etc.). In theory this concept is sound except for the fact that it was based upon the presumption of full employment. Full employment these days does not exist and in the U.S. hasn't for some time.”

CommentI hadn’t realized that Smith had said anything about full employment being a necessary condition for countries to benefit from trade. Come to think of it, I do not recollect Smith saying anything about employment being ‘full’, ‘partial’ or non-existent. Trade is about consumers, not producers, who may very well be producing domestic goods for local exchange and not goods for foreign trade.

The necessary condition is ‘effectual demand’ for markets to function. If the entire workforce, or most of it, is unemployed and without the means of subsistence, they won’t be buying much and this will reflect in their comparative states of, or lack of, opulence.

No economic system so far devised has it workforce fully employed all the time with nobody in-between jobs. There is always some unemployment at less than full employment (however measured), with millions changing jobs, others searching and some proportion unemployed for long periods (with incomes to match, usually low). Smith did discuss the theoretical possibility of an economy stagnating, even in absolute decline. But not about an economy no longer exchanging products in markets.

Anyway, read the whole article if you are willing to read crass nonsense, at:

Gordon Brown's Taxes are not 'Easy'

Julia Langdon, of the Daily Telegraph, writes under the heading: “2p won't buy Brown a ticket to No 10” (a reference to Gordon Brown’s budget speech this week announcing a cut of 2p in the standard rate of income tax).

“The clues were all there. Gordon Brown has laid them himself over the past few years, during which acute observers will recall that he has consistently sought to reclaim the considerable reputation of the philosopher Adam Smith - Margaret Thatcher's favourite economist - as a bulwark for his "New Labour" economics.It is, of course, a wonderfully appropriate claim for him to make, not only because of their shared enthusiasm for prudence and a strong sense of the importance of what Smith called "moral sentiments", but only because of the pleasing symmetry provided by their shared home town of Kirkcaldy in Fife. Mr Brown is a skilful politician, as we all know, and, despite his clumsiness in anything to do with public relations, he still has an ability to spot a gifthorse when it comes cantering towards him at breakneck speed.

Thus he embarked some while ago on rescuing his distinguished former fellow citizen from the clutches of the political opposition. At one point, when being a member of "New Labour" was something that people still boasted about, he claimed that Adam Smith was a spiritual early member of "New Labour". In a lecture at the University of Edinburgh five years ago, he specifically refuted the idea that Smith's belief in the free market made him an exclusive Conservative hero. He has associated his own name with that of the annual Adam Smith lecture. Last year, the Governor of the Bank of England found himself making the long trek north for the same reason. And this month he put the man's face on the £20 note.

What other clues did we need, for heaven's sake, that in preparation for his life after the Treasury, Gordon Brown may have been reading a bit of Adam Smith and contemplating his philosophy and might even be considering a cut in income tax?"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things," wrote Smith in his Essays on Philosophical Subjects.

So there you have it. Easy taxes is what everyone wants. While Mr Brown's main objective in what surely must have been his last Budget - under what circumstances would he remain as Chancellor if he does not, after all, become Prime Minister later this year? - was to keep a careful control on the Exchequer, he also wanted to please as many people as possible and simultaneously confound his enemies.”

CommentI have a few quarrels with Julia Langdon in her interpretation of Adam Smith’s 1755 paper defending himself against charges of plagiarism. I think the notion of a standard tax rate of 20 pence in the pound could hardly be described as ‘easy taxes’, especially as the top rate is 40 pence with an 11 pence in the pound National Insurance ‘tax’ added to the charge, plus all the other taxes, such a Value Added Tax, Stamp Duty, television licenses, car duties, petrol taxes, inheritance taxes and many ‘stealth taxes’ that Gordon has imposed in his ten years as Chancellor of the Exchequer.

And set against the reduction of the standard rate from 22 pence to 20 pence, we have to take account of the abolition of the old 10 pence starting band, which moves millions of low paid employees straight into the 20 pence band. What Gordon giveth, Gordon takes back (and as a good Church of Scotland member, Gordon knoweth his Bible).

Smith would have taken the whole picture into account and not just the headline spin. He would also have been somewhat surprised to see public expenditure above 40 per cent of GDP, a sharp rise from nearer 10 per cent in his day. Smith’s concern was what we call growth – he called progress to opulence – and one of the causes of wealth was summed in his growth model as the allocation of net profits to productive activity – products of land and labour that generate a revenue that covers the cost of the factors, plus a net profit for the next round of ‘the great wheel of circulation’.

State expenditure is largely on the products of unproductive labour (as a factor), no matter how useful or necessary its output maybe (defence, justice, education, health, and those public projects that facilitate commerce). These do not replace the stock of capital used in their production, unless they charge a market fee. All capital directed away from productive activity alters the balance between natural growth inducing activity and consumption.

Neither New Labour nor Conservative governments are Smithian. Smith did not support any political party in his day, and it is most unlikely that he would qualify, or wish to do so, as a ‘spiritual early member of "New Labour".’ This is as meaningful as those neoclassical economists who claim him as a “spiritual early member of Chicago’s faculty’ (George Stigler said Adam Smith was ‘alive and well and living in Chicago’).

Through a Glass Darkly

A grad student calling herself Jane Dark recommends a short reading list which includes the following:

“In small doses, of course, with poetry in between, to keep the economics from running together -- the reading list should include:

Adam Smith, The Wealth of Nations, Book One, chapters 1-2 (about 10 pages, and including the illustration of the pins, the desire to save labour, and the desire to make a bargain which is advantageous to oneself, and not necessarily advantageous to the other party)

--and possibly a couple of the selected famous quotes, re: the invisible hand, etc.”

CommentNo, relax. I am not going to make a heavy response to such an innocent recommendation because I hope her readers follow her advice – without taking too much notice of her comments interpreting what Smith didn’t write!

Jane Dark might care to note that there is only one quotation using the metaphor of an invisible hand in Wealth of Nations, but scores illustrating exceptions where the unintentional actions of self-interested people do not cause benign consequences for society.

Friday, March 23, 2007

The Real '300' - Not in Wars that Kill but a War of Words that Educates

Scotland's Herald (23 March) continues with one of the best informed discussions of the brilliant article by Ian Bell on the authemtic message form Adam Smith (discussed on Lost Legacy this week) that any press anywhere in the world has published this year (I see most of them; many are less than worthy of the label 'discussion').

The Herald's editorial team should be congratulated for their commissioning of Ian Bell for the original article and for publishing the daily letters from interesting correspondents, particularly as it has brought the considered judgement of Dr Eamonn Butler, of the Adam Smith Institute, the premier source of advocacy for the application of Adam Smith's political economy to address 21st century problems and opportunities.

I commented on a minor quibble with Dr Butler's presentation of Adam Smith's in The Guardian newspaer yesterday. Today I am taking the unusual step of publishing Dr Butler's 342-word letter below (apologies to The Herald for any breach of its copyright but this is a non-commercial site and we have been mentioning The Herald all week and the world wide publicity for the Herald should be a worthy recompence for not asking for prior permission):

NEIL Davidson (Letters, March 22) is quite right that we cannot press-gang an eighteenth-century thinker such as Adam Smith into being a 21st-century politician. He wrote before the Industrial Revolution changed everything, before trade unions, before state health or pensions, and when the idea of a government spending more than 40% of the nation's wealth would have seemed the greatest tyranny.

Davidson is right also that Smith did not promote some caricature of capitalism, red in tooth and claw. Rather, he supported markets - free and competitive markets - as the best way to create and spread wealth, particularly to the poor.

Free markets do not cause poverty, inequality and environmental problems, as Davidson suggests: it is the lack of them which does that. Indeed, Smith knew that free markets must be husbanded. Traders, who love monopoly, were quite willing to use the political system to extinguish free markets and limit their competition. So he did not advocate laissez-faire, but saw a vital role for the law in keeping markets open, honest and free. And markets, a form of mutual co-operation through voluntary exchange, are actually central to Adam Smith's view of humanity. We trade for our own benefit, of course; but then we act morally in order to spare ourselves the resentment of others. There is no "problem" of conflict between Smith's "economics" and his "ethics" - Adam Smith is, in fact, a social psychologist, and his social psychology is entirely consistent.

Davidson tries to downplay Smith's belief in markets by citing his "consistent" support of state education. It was anything but. Smith suggested some state spending on buildings, but felt that if teachers were to have any incentive to perform well, they should be paid by their pupils rather than by the government. "Public services," he wrote, "are never better performed than where their reward comes only in consequence of their being performed, and is proportioned to the diligence employed in performing them." He had a point."

Eamonn Butler, Adam Smith Institute, 23 Great Smith Street, London

CommentThis letter is a great winner of the Lost Legacy Monthly prize for demonstrating outstanding understanding of what Adam Smith was about.

You should read the whole week's correspondence to see what Dr Butler was up against in the misunderstandings of some other correspondents. Plus read the original article by Ian bell (details on my postings through the week).

The Herald is published in Glasgow not far from where the University of Glasgow was originally sited and where Adam Smith lectured (see his Lectures in Jurisprudence, Liberty Fund, 1982), where he wrote The Theory of Moral Sentiments (1759) and from where he wrote the Early Draft of the Wealth of Nations (1763).

Thursday, March 22, 2007

A Quibble or Two About What Smith Meant

Just in case anybody gets the impression that Lost Legacy only criticises the Left, I offer a couple of letters from farther along the spectrum nearer the ‘middle’. One is from Dr Eamonn Butler, Director of the Adam Smith Institute, a tolerably known think-tank with an enormous readership and close contacts with many MPs disposed favourably to freer markets.

The Guardian (21 March 21) carries correspondence from readers about Tristram Hunt’s piece I commented on earlier this week. Dr Butler comments:

“I am delighted that Gordon Brown wants to claim Adam Smith as his own (Why Brown reveres the man on the new £20 note, March 19). But any attempt to kidnap an 18th-century figure as a 21st-century political mascot is forlorn. Smith wrote before the industrial revolution transformed things, before capitalism (he never mentions the word) or organised trade unions, before state health or pensions, when favoured trades enjoyed state monopolies, and when the idea of a government spending over 40% of the nation's wealth would have seemed the greatest tyranny.

Tristram Hunt writes that Smith was no "laissez-faire free-marketeer". Half right. Smith did not support laissez-faire and, again, never mentions the term. Yet he was a free-marketeer. He believed that voluntary exchange in free markets benefited both buyers and sellers. But he knew that merchants were skilled at using political power to distort free markets and limit their competition; so he saw a role for the law in keeping markets open, honest and free.

Smith maintained that this free-market system spread prosperity throughout society, particularly to the poor. True, his few mentions of the "invisible hand" are oblique, but the idea pervades every line of his writings - that the free interaction of human beings, though done solely out of self-regard, nevertheless produces a general benefit. A far surer route to peace and prosperity, he thought, than the assertions of enthusiasts or the commands of governments.”

CommentAll but the sentence is OK: “True, his few mentions of the "invisible hand" are oblique, but the idea pervades every line of his writings - that the free interaction of human beings, though done solely out of self-regard, nevertheless produces a general benefit.”

A small but important quibble. I would prefer to see a qualification inserted between ‘nevertheless produces’. Something like, ‘could produce’ or ‘often produces’, rather than leaving it as if it ‘always’ produces. The self-interests of individuals may have many different motives, many benign, which have the result stated – society is better off, but they may also be malign (monopolistic, protectionist, a ‘conspiracy to raise prices’, even support for wars and colonialism), and many of them specifically stated by Smith and not left for the reader to conclude separately. In many cases, we could add externalities like pollution, careless and unsafe working practices, work place ‘tyrannies’ and other abuses.

Markets are run by people and people are ‘weak and imperfect’. They may also be consumed with greed, avarice, a lack of ‘common humanity’ (a phrase of Smith’s) and whatever comes under the rubric of the ‘vile rulers of mankind’. OK, I am sure Dr Butler realizes this and the need to keep the word count down imposes limitations of including qualifications.

Another correspondent writes to The Guardian:

“Tristram Hunt neatly illustrates how Adam Smith expresses the lofty ideals of the European Enlightenment in the homely terms applicable to the butcher, the brewer and the baker, such as those of Kirkcaldy. However, this encapsulates not only the relevance but also the limitations of Smith's message for today. For in retrospect, the outstanding legacy of his epoch did not concern such domestic issues at all, being rather the opening out of the great divergence in fortunes between the rich and poor countries and peoples of the world, not least the extension of European domination over those peoples of other continents to whom Smith referred to as "naked savage".

Dr Hugh Goodacre (University College London)

CommentThe thesis implied in Dr Goodacre’s last line is dubious. Living standards in the 18th century across the world had not changed much for the majority in two thousand years, probably as many as ten thousand years, when agriculture appeared in parts of Europe, Asia and north Africa, which contributed (caused?) a rise in per capita consumption enabling populations to grow.

From the 16th-18th centuries, domestic consumption in certain countries began to rise, ‘slowly and gradually’, an event of historic interest, because unlike previous changes, this time it continued. Combined with technological and knowledge enhancements that led to further changes. The re-appearance of commercial society began to reverse the steady decline experienced since the fall of Rome in the 5th century.

Into this context, Smith’s use of the ‘butcher, brewer, and baker’ example was connected to the operation of exchange by voluntary negotiation, which was the driving force for the gradual pacification of inter-communal violence and became a viable alternative to plunder. Exchange is very much central to markets and inter-human relationships today. Smith’s ‘homely’ example is still not appreciated by readers of Wealth of Nations (for example the daily reminders we get that readers still see it as a manifestation of ‘greed’ – because they read it too fast).

That ‘rich’ countries diverged from ‘poor’ had nothing to do with implied racialism in the use of terminology, such as in ‘naked savages’ for the inhabitants of Hunting societies. This referred to the differences in the modes of production in countries with developed divisions of labour (the manufacture of the labourer’s common woolen jacket compared to a ‘naked savage’ who was poorly clothed in socieies without that division of labour). It was reflected in the short life spans of the North American ‘Indian’ and African ‘prince’, absolute rulers of ‘ten thousand’ of their brethren (Wealth of Nations, Chapter 1).

Every author of the time used this expression. If Dr Hugh Goodacre had been alive at the time and working at any of Oxford, Cambridge, Edinburgh, Glasgow, St Andrews or Aberdeen universities, he too would have used the phrase. If he had taught in Scotland, he would also have known that the Scottish courts declared slavery illegal in 1778, long before Wilberforce began his campaign against it.

The racialist overtones to the ‘Noble savage’ were a 19th century development from the USA (Ellingson, T. 2001. The Myth of the Noble Savage, University of California), for which Smith was blameless, though not Thomas Carlyle (1848).

The ‘great divergence’ came about because some countries got onto the development path and the rest didn’t. But the former was not a consequence of the latter. The politics of all countries are part of theie growth, no growth paths. Colonialism was not recommended by Adam Smith – he didn’t think it was worth the cost in wars (and how right he was in that). Colonialism is an inevitable extension of mercantile commerce, which Smith railed against in Book IV of Wealth of Nations. Governments cause colonialism to be affected, not Smithian markets.

The Far Left Should Look Outside their Windows and Confront Reality

The Herald, from which I have commented already on Ian Bell’s admirable article, has provoked a lively correspondence from ‘left’ critics of Smith – it is, after all, published in Glasgow, a city with a tolerable reputation for socialist ideas and practices.

Among them, this from Neil Davidson, Department of Geography and Sociology, University of Strathclyde (my alma mater), where he criticizes an earlier letter from James Young, a historian farther to the left than Neil, with a tolerable reputation in the media for robust polemic (the impartial spectator is not managing to reduce his language to something we can all ‘go along with’):

“When Smith attacks unproductive labour, he is not making some timeless critique of state employees, but thinking quite specifically about Highland feudal retainers. When he attacks monopolies, he was not issuing a crystal-ball warning against the emergence of nationalised industry in the twentieth century, but criticising those companies of his own time which relied for their market position on the possession of exclusive royal charters.

It is not simply his deep distrust of businessmen (an aspect of The Wealth of Nations which Young, of course, completely ignores); he intuited, long before industrialisation really took off, that it would lead to a massive degradation in the condition of labourers and their reduction to mere "hands". It is this nightmarish (and deadly accurate) anticipation, which he shared with Adam Ferguson and John Millar, that later informed Hegel's conception of alienation, and through him, that of Marx.

Understood in the context of the Scottish Enlightenment conception of human potential, the description of pin manufacture at the beginning of The Wealth of Nations is not only a primer in the joys of the division of labour: it is a vision of Hell.

We know now that the market has not resulted in the realisation of human freedom, but in poverty, gross inequalities and the possibility of environmental collapse, but Smith was not to know this.”

CommentClearly, Neil Davidson understands something about Adam Smith that James Young has not. However, he is not quite there yet. Smith’s view of ‘unproductive labour’ had little to do with ‘highland retainers’, as opposed to retainers generally. Any labour, no matter how valid socially and useful it may be (or how useless, too) that did not reproduce its cost from its revenue that was sufficient to meet those costs and produce a profit was unproductive.

Mainly because the product of such labour was not sold in markets; retainers, and so on, received a wage only. Those who served at a rich person’s domestic dinner table worked for a wage; what they did was not ‘sold’ to the rich man’s guests; soldiers serving in the army did not have their services sold – they ‘did and died’ for the King’s shilling. This left productive labour, the products of which were sold in markets to earn revenue (the price of their products) which met their wage costs, the rent of landlords, and the profits of the Master artisan.

Smith did not predict that commercial society would lead necessarily to ‘massive degradation’, etc. It was what could happen if society did not act. He advised that society could avert such extrapolation by investing ‘small sums’ in public education, and partly paid for by parents (the richest paying more). The warnings about the former were in support of the adoption of the latter measures by the government, using the existing Scottish model as an example for educational reform in England. His advocacy took until 1879 to come into effect with the government passing the first Education Act.

I think calling what happened from the division of labour a “deadly accurate” anticipation is somewhat exaggerated. Real living standards rose throughout the industrialisation period (despite dreadful conditions in its early years), but the alternative prospects for the working classes were even more dreadful (as they are now in many cases in the developing world – and even worse in the non-developing world with famines, wars and neglect).

Likewise for the so-called ‘vision of Hell’ and the alleged claim that “the market has not resulted in the realisation of human freedom, but in poverty, gross inequalities and the possibility of environmental collapse”. Like a lot of neoclassical economists, apparently, geographers and sociologists do not look outside their windows. If markets have not been associated with greater freedom, I wonder what the non-market economies would be described as, by geographers ands sociologists on any freedom index they care to devise.

The problem with poverty is the absence of markets, not their working. From the wealth created by market operations, the solution to ‘environmental collapse’ will be found and paid for, should the ‘possibility’ become the actuality. There is no other source for the resources needed. Manna and the money equivalent of the goods, technology and knowledge are not going to arrive from ‘heaven’ – they never have in the past, and none of Kim in North Korea, Castro in Cuba, Chavez in Venezuela, nor Migabe in Zimbabwe, are going to do it either.

And this is the real agenda of those on the left, who in 19th century claimed that markets would lead to the immiseration of the labouring poor and the affluence of only the rich– it didn’t – are now claiming in the 21st century that markets will lead to environmental collapse because the vast majority of the people living in the developed world are affluent, not poor. I do not expect either James Young or Neil Davidson to see a contradiction in their stances.

The other day I was looking at my grandfather’s 1880 birth certificate from Ayr, whose father, Alexander Kennedy, is listed as ‘coal miner’. My grandfather also became a coal miner in the early 1900s. He was called Gavin and I was called after him. By all accounts, my grandfather’s working life was tough – coal mines were no place for the ‘weak’ – and he sometimes quoted lines about his experiences for some years he spent in Canada, before returning to the pits in Scotland: ‘This is the law of the Yukon, where the strong shall thrive, and the weak shall perish, and only the fit survive.’

Now, my son, called ‘Gavin Alexander’, works with computers in a bank. The pits have long gone. His office is air conditioned and well-lit, he lives in flat he owns not far from where my grandparents lived in Edinburgh (they paid rent for years and never owned anything but the clothes they wore and the bits of furniture they bought second-hand). To compare inter-generational living standards is ‘no contest’ in terms of the supposed immiseration among the ‘alienated’ zombies, beloved of Marxist intellectuals (hardly the poor souls themselves that they imagine to be the reality the great-grandchildren of Smith’s pin-makers).

I suggest James and Neil look out of their windows, consider the inter-generational wealth shifts in their own families and modify their perceptions of the effect of markets.

Tuesday, March 20, 2007

It Takes More than Labour Alone to Create Wealth

Following the excellent article by Ian Bell on Adam Smith in The Herald, correcting some ideas about him that are patently wrong (though a bit off in some respects), which I praised on Lost Legacy, The Herald’s letter page carries a contribution by Alan McCombes, the ‘policy coordinator’ of the ‘Scottish Socialist Party. In it he writes:

“Adding to Ian Bell's superb essay on Adam Smith, your correspondent RF Morrison rightly differentiates between money and wealth (March 19). His definition of wealth, "the production of socially useful goods and services", is spot-on.Unfortunately, almost all our mainstream parties' politicians fail to understand that distinction. They endlessly extol the virtues of Scotland's "wealth creators" and promise them an array of incentives designed to encourage further wealth creation. In fact, many of these so-called wealth creators do nothing of the sort. Their main contribution to society is to shuffle money around, enriching themselves in the process.

It is not necessary to have a PhD in economics to work out that wealth is created, not by merchant bankers, venture capitalists, property speculators, currency dealers, stockbrokers or shareholders, but by those who work in our factories, offices, call centres, hospitals, schools, buses, trains, farms, fishing boats, mines, oil rigs, newspapers and countless other workplaces.”

CommentThe premise of in Alan Mcombe’s letter is slightly wrong (the way it reads):

‘His definition of wealth, "the production of socially useful goods and services"’. If ‘his’ refers to Ian Bell and excludes Adam Smith, McCombe is wrong in so far as Adam Smith is concerned.

Book IV of Wealth of Nations (and elsewhere, of course) makes the point several times in Smith criticism of ‘mercantile commerce’ that ‘wealth’ is not the amount of gold and silver bullion a country collects. Wealth, writes Smith from Book I onwards, is the ‘annual produce of land and labour’ in a country; it is the annual output of the ‘necessaries, conveniences and amusements of life’. Money is merely a means of exchange to facilitate exchange in markets; it is not wealth, except in the popular imagination.

It is not clear what ‘socially useful’ means, though it sounds vaguely Marxist.

The idea that only one factor of production creates wealth (in Smith’s sense) is false, and patently so. Many countries have vast resources of labour available, but live in abject poverty. They do not have access to capital – labour will not work without wages to buy the ‘necessaries, conveniences, and amusements’ of life. If all you need was labour (willing or coercible) to work to produce real wealth then Mao’s China would have been growing rich without access to foreign capital investment and technology. India and Africa would be virtual Eden Gardens, and so would all points of the compass outwards.

If Mr McCombe believes that getting rid of the people who bring capital to the opportunities to produce real wealth (the annual produce of ‘land and labour’ in Smith’s 18th century terms) – an analogous view to the Russian communists who decided that the ‘Kulaks’ (richer farmers) were an obstacle to the creation of wealth, and Mao tried with the ‘communes’ – his recipe for wealth creation is as likely to be as successful as that of Mugabe’s Zimbabwe, the tragedy of which can be seen before our eyes today.

Adam Smith understood about the creation of wealth. Mr McCombe, and the 'wealth is money' people too, apparently do not.

Monday, March 19, 2007

A Literate Banker Writes

What a nice change to read a literary piece from a banker who knows something about Adam Smith and Music that is worth reading.

Stephen King, managing director of economics at HSBC (“the world’s local bank”) writes “In praise of Adam Smith, Mozart of money” in today’s Independent (19 March). The occasion is the replacement of the image of Elgar, British musician, by Adam Smith on the UK’s £20 note today (announced by Mervyn King in Kirkcaldy last year and reported on Lost Legacy – I was in the audience).

“Elgar should never have been on British banknotes. His appearance represents a peculiar celebration of mediocrity.

[T]hink of Elgar's position in the pantheon of great composers. What if Mozart, Beethoven or Verdi had been British? Would Elgar then have found his way on to a banknote of any description? Might he have displaced a British Bach, or challenged a Scottish Schubert? I somehow doubt it. Elgar should never have been on British banknotes in the first place. His appearance represents a peculiar celebration of mediocrity, the equivalent of choosing Noel Coward rather than Shakespeare to highlight Britain's cultural heritage.

Mediocrity is not a word you would ever associate with Adam Smith. He is genuinely the father of economics. He's one of the economic greats, the Bach, Mozart or Beethoven of his discipline. Edward Elgar, thankfully, he is not. His ideas may have been hijacked by Margaret Thatcher and the Tory right in the 1980s, but few politicians these days would argue that Smith was wrong, or representative of a particular political view. He just happened to be one of the very best economists the world has ever produced. He was British to boot.”

“Smith is often, unfairly, portrayed as a man who argued in favour of selfish behaviour. His supporters may occasionally have given this impression (Mrs Thatcher once famously claimed "there is no such thing as society") and his words are sometimes misquoted to support this view ("It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."). Yet, throughout his works, he offers a sophisticated view of what, precisely, makes economies tick.

He is, of course, most famous for the invisible hand and the division of labour. Smith recognised the importance of the price mechanism. The invisible hand proved much better at resource allocation than any number of state planners, an observation sadly lost on those Soviet leaders who led Russia and its satellites into economic stagnation. As for the division of labour, his famous description of the pin factory stands the test of time.”

"These arguments all appeared in his The Wealth of Nations, the first major book on economics and, mercifully, a book bereft of mathematical formulae. It was first published in 1776. He also, though, wrote The Theory of Moral Sentiments (1759). There, he established some of the ground rules for modern societies. He distinguished between self-interest and selfishness. For most of us, it's in our self-interest to have a system of justice in which each of us can expect to be treated fairly. From time to time, we might choose to cheat the system, thereby acting selfishly, but, were we all to act in this manner, the system would eventually crumble."

"A system of justice, in turn, can underpin property rights. Smith's insights in this area were remarkable. He understood the need for legal "rules of the game", recognising that, otherwise, markets would fall apart. How could there be division of labour, for example, if workers didn't know, from one week to the next, whether they'd receive any wages for their pin-making efforts? The invisible hand might seem like a remote and rather cold concept, but Smith knew that, at the end of the day, the invisible hand would only work in a society where self-interest included showing sympathy for the interests of others, expressed through a binding set of legal rules.”

CommentI wouldn’t equate the invisible hand with the division of labour, or with his ideas about growth, but Stephen King’s understanding of how Wealth of Nations fits into his Moral Sentiments (and Lectures on Jurisprudence) is entirely refreshing, especially from a working and literate economist.

Now There’s a Thought for Smithian Growth

In the 19th March edition from the Foundation for Economic Education (FEE) under the heading, “Migrants Send More Money to Latin America than Foreign-Aid Donors Do”, we find this gem:

"The amount of money sent home by Latin American migrant workers to their families has reached more than $62bn. This figure now exceeds the combined total of all direct foreign investment and foreign aid to Latin America." (BBC News, Monday)

And it's not going to a government.”

CommentFor Smithian growth models that is interesting. Smith said that the initial source of capital accumulation necessary for sustained growth (and with it development) was from the savings of productive workers applied to investment.

The transfer of $62 billion from migrant workers in the US to Latin America, and the smaller amount from Polish migrants in Scotland to Poland, any percentage of which seeps into productive investment (putting labour to work in the recipient economies) will have growth inducing effects.

Growth is a slow and gradual process (recent rates in India and China are historically high), which over time, under compound interest multiplication, can double the GDP in 25 years when as low as about 2.5 per cent. Bypassing government sticky hands, via private persons is a unique opportunity for the recipient countries.

If it relieves local poverty as well, or instead, that too is all to the good on grounds of what Smith called 'common humanity'.

Brown's Reverence for Adam Smith Not Based on Understanding

In the Guardian Unlimited (19 March 2007), under the heading: “Why Brown reveres the man on the new £20 note”, we find Tristram Hunt addressing the admiration of Gordon Brown, British Chancellor of the Exchequer, for Adam Smith:

“Yet the Smith who Brown reveres is not the laissez-faire free-marketeer of neoliberal lore - the Smith whom Sir Keith Joseph put on his infamous 1979 reading list for civil servants and who saw the magic of economic growth delivered by the invisible hand of the market. "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-love, and never talk to them of our own necessities but of their advantages," as he famously put it in The Wealth of Nations. This was the "greed is good" Smith of the Gordon Gekko school of raw capitalism.”

"But over the last 20 years a rather different Smith has emerged. One of the traditional difficulties of interpreting his philosophy used to be the problem of uniting his Theory of Moral Sentiments (1759) with The Wealth of Nations (1776). The former stressed the role of virtue, sympathy and benevolence for the proper functioning of the public realm, while the latter highlighted the public good accrued from the private greed of the butcher, brewer and baker."

“[Emma] Rothschild has even suggested that Smith's evocation of the "invisible hand" rather than being a hymn to the benign wonders of the free market is, in fact, "best interpreted as a mildly ironic joke". His use of the phrase in The Wealth of Nations was specifically concerned with reducing import duties, while it also alluded to Macbeth's calling forth of darkness "with thy bloody and invisible hand" to cover up his crimes.”

CommentI hope Gordon does not read the famous ‘butcher, brewer, and baker’ paragraph so casually as to confuse it with Gekko’s ‘greed is good’ speech from Hollywood. It has nothing to do, and neither did Smith, with greed. Quite the reverse, in fact. Read it more carefully. It is about the dangerous futility of looking for what you want, in this case your dinner, from the benevolence of others – despite any inclinations they might have for your plight, nobody but a beggar would rely on others for their needs (there just ain’t enough to go round for everybody to live off others).

In civilized societies we are all dependent on others. It would be the height of greed to expect others to do other than to exchange their surplus output for your surplus output. We work to produce the annual output of society and from our revenues we buy our shares of what everybody has produced. That’s what markets do, and do better, Smith noted, than all other modes of production that have been tried so far.

We address others who have what we want (our dinners and much else besides) and are willing to exchange what they have for what they want, mediated by the invention of money, which we obtain by working to produce what others want. If Tristram Hunt or Gordon brown know of a better system for resolving our total dependence on each other we await the details. Abusing markets as ‘raw capitalism’, is no substitute for offering a workable alternative that does not include the ‘raw tyranny of socialism’.

Emma Rothschild’s writings on the metaphor of the invisible hand are extremely good (Rothschield, 2001, ‘Economic Sentiments: Adam Smith, Condorcet and the Enlightenment’, pp 116-56, Harvard,).

Tristram attributes it to being ‘specifically concerned with reducing import duties’ rather than being ‘a hymn to the benign wonders of the free market’. I do not think so; it is in a chapter in Book IV of Wealth of Nations (p 456) on restraints on imports, but the metaphor is applied to the consequences of the human motivation of risk aversion and had nothing to do with markets (that is covered in Book I).

Mixing the two up is a cause of much misunderstanding that had nothing to with Adam Smith.

Smith's Natural and Market Prices had Nothing to Do with Invisible Body Parts

Indian newspapers are written by educated journalists and contributors. They often refer to Western intellectuals with a familiarity that shows their university syllabi include swathes of work from philosophers, economists and other figures at home to students in North America and Europe. Unfortunately, this includes the Chicago version of Adam Smith and derivatives therefrom.

In today’s Times of India editorial (19 March) I come across these paragraphs in an article about bears running rampant in the stock market:

“When the market is overheated, as many analysts believe about the Indian stock market, it is natural that bears will come in to the picture and pull it down.

That is exactly what Adam Smith meant by the invisible hand — the free market would always adjust to a stable equilibrium. Or to use the laws of physics: What goes up must come down.”

CommentSee what I mean?: ‘the free market would always adjust to a stable equilibrium’. And, apparently, this is ‘exactly what Adam Smith meant by the invisible hand’!

Exactly where did he write that he ‘meant’ anything remotely like this assertion? Certainly not in either Moral Sentiments or Wealth Of Nations. He explained in Book I of Wealth of Nations how market prices would oscillate around the notional ‘natural price’ – the price at which the contributors to its costs of production received their full value – and how market price deviations from natural price signalled whether to supply more or less of their contributions (land, labour and capital). But he said nothing about ‘adjusting to a stable equilibrium’. Market prices were actual prices, natural prices were coincident with factor costs, not real, and nothing he said in Book I was to do with financial instruments or share prices.

Moreover, he wrote of ‘an invisible hand’ in Book IV in the context of the consequences of human motivation – risk aversion – and not in relation to market prices. That was added by the neoclassical economists of Chicago and their epigones who spread across the world’s campuses armed with notions about Adam Smith bearing no relation to the Adam Smith from Kirkcaldy.

Sometimes a little knowledge is dangerous to truth and accuracy, both valued among credible journalists.

Saturday, March 17, 2007

News of Important Conference on Adam Smith Scholarship in 2009

Interesting pre-announcement news of what looks like a cracking conference in 2009 to commemorate the 250th anniversary of ‘The Theory of Moral Sentiments’ (1759). The International Adam Smith Society and its annual publication, ‘The Adam Smith Review’ are the sponsors and it is to beheld at Balliol College, Oxford University, where Adam Smith spent six harrowing years from 1740-46.

Smith’s unhappy experiences at Oxford was not from its difficult academic work, quite the reverse; he found Balliol a complete contrast to his three years as an undergraduate at Glasgow (1737-40), where there were lectures every day, from 7.30 am, followed by tutorials during which students were expected to answer questions and read their essays (some as long as 70 pages) on subjects set by faculty. At Oxford, in contrast, students attended prayers twice a day and hear ‘lectures’ twice a week, given by indifferent faculty, many of whom didn’t bother too much, having students translate passages from set books which, as Scots say, ‘didn’t set the heather on fire’ for their academic rigour. I should say that nothing as slack and third rate as this is experienced at Balliol today. Oxford is one of the world’s premier universities.

The low demands on Smith left him plenty of time for his own studies, which he undertook with some enthusiasm, particularly in his studies of the classical Greek and Latin, English, French and Italian literature, and into the wider theme of moral philosophy, from which gradually he lost his religious convictions. We have a remarkable remnant of these studies in his essay on the philosophical method, published posthumously in 1795, commonly known as his ‘History of Astronomy’, though it is more a critique of religious belief, disguised as pagan superstition.

The opportunity provided by the 2009 conference is seen by the listed speakers and the invitation for Smithian scholars from any discipline to participate. I append the official details below and hope many readers will consider attending:

“A conference to commemorate the 250th anniversary of The Theory of Moral Sentiments (January 6-8, 2009 Balliol College, Oxford / Organised by the International Adam Smith Society and The Adam Smith Review)

Although Adam Smith is better known now for his economics, in his own time it was his first book, The Theory of Moral Sentiments (1759), that established his reputation. Just as scholarly work on Smith has challenged the free market appropriation of Smith’s Wealth of Nations, so it has also come to appreciate the importance of Smith’s moral philosophy for his overall intellectual project. This conference, to be held at the college Smith himself attended from 1740-46, and at the beginning of the year marking the 250th anniversary of the publication of The Theory of Moral Sentiments, will provide an opportunity to re-evaluate the significance of Smith’s moral philosophy and moral psychology, the relationship between them and his other writings on economics, politics, jurisprudence, history, and rhetoric and belles lettres, and the relevance of his thought to current research in these areas. Papers on any of these topics, and from any discipline, are welcome.

Participants will be notified that their proposals have been accepted for the conference by December 1, 2007.

Publication

A selection of conference papers will be published in a special commemorative volume of The Adam Smith Review (Routledge) [www.adamsmithreview.org], entitled The Philosophy of Adam Smith, edited by Vivienne Brown and Sam Fleischacker (planned publication date 2009). To meet the publication schedule of the volume, participants who would like their papers to be considered for it should submit complete drafts to the editors by September 15, 2008. Only new, previously unpublished work will be included in the volume.

[Thanks to Phileconomicus ('A Blog on Philosophy and Economics') athttp://philecon.wordpress.com/2007/03/17/call-for-papers-the-philosophy-of-adam-smith/]

Department of A Breath of Fresh Air: read this lively piece on Adam Smith

If you read nothing else this week-end I recommend you to read a newspaper article on Adam Smith, warts and all, in Saturday’s ‘Herald’ (Glasgow), entitled “Adam Smith is worth £20 of anyone’s money”.

No, its not a eulogy, and no, I wouldn’t have written it in the style adopted by its author, Ian Bell (and no, I don’t know anything about him), but it is written in a splendid voice so different from the average newspaper article written by space-fillers that pass for serious journalists nowadays.

“Adam Smith had big teeth and bad French. He never used the words laissez faire and he never made a bundle playing stocks. When he talked of the "invisible hand" of the ineffable global market he was being ironic, even "witty". He thought he was a philosopher, not a share-picker, and he would have blanched at our private equity pirates.

The fatherless son of Fife wanted government off people's backs. That's true. In the eighteenth century he threw the word "liberty" around with the best of them. The idea that the state could ensure anyone's prosperity by fixing the trade rules, or fiddling with the tax tables, made him angry. Businessmen - transnationals, please note - who used their muscle to ensure that government performed precisely this counterproductive trick made him angrier still. Smith said they were wasting everyone's time.”

CommentThe style is a bit like O’Rourke’s recent book on Adam Smith, but Ian Bell gets closer to the real Adam Smith from Kirkcaldy than does the cardboard imitation imagined in Chicago and taught across the world to unsuspecting students who go on to teach the same version to upcoming generations.

I would prefer readers new to Adam Smith to start with Ian Bell’s short article than what is usually on offer from some serious scholars who leave a lot to be desired in the department of historical accuracy.

Friday, March 16, 2007

Smith's Nuanced View of Self-Interest Benefiting Society

It is not just a pedantic point to make when people are only half right about what Adam Smith wrote, nor is it intended to be critical when they may not see the point that is made. The real problem with being half right (apart from it meaning they are half wrong too) is that they miss the far richer legacy of what Adam Smith was actually leaving behind for his posterity.

Consider this somewhat innocuous summary of Smith’s views from a library that is notifying faculty and students about an accession into their stock of an excellent set of essays by distinguished scholars on Adam Smith:

“Many believe that Adam Smith (1723-1790) was the founder of modern economics. In his book, The Wealth of Nations (1776), Smith established the theory of laissez faire—the principle that society's interests are best served by the pursuit of individual self-interest. If each person pursues his own interest, the general welfare of all will be promoted.”

CommentIf what ‘many believe’ about Smith was true, Smith would have been a relatively uninteresting contributor to our knowledge. He didn’t establish ‘a theory of laissez faire’, nor did he state the principle that ‘if each person pursues his own interest, the general welfare was promoted’.

It wasn’t as crude as that. That everybody pursues his own interest may well be arguable, but the pursuit of their own interests does not of itself promote society’s best interests. Some actions and their consequences of some people pursuing their self interests as they see them does promote, unintentionally, society’s best interests in the circumstances, which is not the same as believing that everybody’s perception and promotion of their self interest has that outcome. But on many occasions, people pursuing their self-interest has the opposite effect on society’s best interests. The qualification is important.

People's self-interest can act in ways that undermine society’s best interests. Monopolists pursue their self-interests and narrow the application of capital to fewer opportunities than would occur in the absence of monopoly distortions. Smith makes this point over and over again. Protectionists pursue their self-interests and distort consumer spending by narrowing the range of competing products available to them. This distorts price signals with consequences in terms of real incomes of consumers, altering their behaviour from what it would be in the absence of protectionism. These actions by some people pursuing their self interests do not promote the ‘general welfare’ (and then we have an endless history of what Smith called the 'vile rulers of manking').

Language was not invented by dictat from above. It developed in the uncoordinated actions of individuals creating word sounds to communicate with each other through an emergent order of social evolution over many generations. Markets work in similar ways. In Perfect Liberty they may work smoothly, but, as Smith pointed, human societies did not have to be at Perfect Liberty to progress from savagery to commerce. If that had been a condition for progress we would never arrive at where we are at any particular time. Society’s general welfare emerges from the competing outcomes of myriad self-interested actions, some of which help its best interests to advance and others, many others, which hold it back.

The self-interested corruption of many individuals in developing and non-developing economies conspires to worsen the welfare of their people. When self-interested corruption and criminality reaches endemic proportions, statements that I have quoted above seem somewhat lacking in precision. That is why Smith did not say something to give comfort to those who assert that he did.

The half-right statement from the Library misses the important theme that Smith addressed: political economy is about understanding how specific policies that detract from society’s welfare should be understood first and where practicable, with all due allowance from our common humanity for the time needed for adjustments; legislators should be persuaded of the social benefits of doing so, to allow the benign self-interests of individuals to operate without the distortions from the proclivity for malign self-interests to dominate.